BHP Group PLC (LSE:BHP) gave more details on its decision to plough ahead with the Jansen potash development, but analysts at Jefferies said the economics are "simply not compelling" unless prices rise significantly.
The Anglo-Aussie miner calculated the total capital expenditure for Jansen will be US$5.7bn for the 4.35mln tonnes per annum (mtpa) first stage (S1), with first ore expected in the 2027 calendar year, full production ramp to take two years but with an expected 100-year mine life.
BHP, which has spent US$4.5bn on Jansen since 2008, said that the expected internal rate of return (IRR) using current consensus price assumptions, with unit costs at $100 per tonne and sustaining capex of $15 per tonne, is 12-14% with a seven-year payback.
"This compares to a typical industry hurdle rate of 15% for most large mining projects," said the Jefferies mining analysts.
"Our sense is that mgmt believes there is upside to consensus price forecasts, which could imply a materially higher expected IRR."
There is also further lower-cost growth optionality in this project, with Jansen stages 2-4 potentially taking total capacity to 16+ mtpa at an incremental capital intensity 25-30% lower than that for S1, which on consensus price forecasts, BHP sees an IRR for S2-S4 of 18-20%
While Jansen is a large asset located in a low risk geography and is positioned to sit near the bottom of the industry cost curve with significant embedded organic growth optionality, "the math to develop Jansen is simply not compelling unless potash prices surprise to the upside, in our view", said Jefferies.
All things considered, the analysts said they have "a neutral view" on Jansen, though the price target on BHP shares of 2,550p warranted a reioteration of the bank's 'buy' rating.